The BOE asserted at their September MPC meeting that if the November outlook fell in line with August forecasts then most MPC members expected to support a further rate cut. GBP has moved steadily lower over recent months as Brexit uncertainty and investor expectations of further BOE easing have continued to weigh on prices. However, the prospect of further easing at this meeting is not entirely clear cut.
Data & Developments
Persistent and significant weakness in Sterling is improving the inflation outlook and key data sets have continued to surprise positively
- Q3 GDP QoQ 0.5% vs 0.3% exp
- Q3 GDP YoY 2.3% vs 2.1% exp
- September CPI YoY 1% vs 0,9% exp
- September Core CPI 1.5% vs 1.4% exp
- Average weekly earnings 3m/Aug 2.3% vs 2.1% exp
- Sep PMI data marked 3 consecutive month of upside surprises
- October PMIs broadly positive with Services & Composite beating but manufacturing missing
The uptick in inflation represents a significant jump on the year, confirming the upward trend. The uptick in growth will also be welcomed by the MPC along with the upward trend in PMI data which showed Service Sector growth hitting 9 month highs in October. These prints could prove to be enough to keep the BOE on hold at this juncture. Although the MPC have often given guidance that the final rate cut will depend on the medium-term outlook it is inevitable that short term data flow is likely to exert some influence on the bank’s decision making process.
The updating of the bank’s quarterly inflation forecast is likely subject to some upside risk given the sizeable decline in Sterling which has fallen over 5% on a trade-weighted basis since the August forecast which should see an increase in the 2/3y outlook aswell as an increase to the expected CPI overshoot
Baseline Scenario – Rates On Hold
The baseline scenario for the meeting could be seen as a clear cut. The MPC’s previous guidance in September that the November outlook was in line with August forecasts and as such, the MPC expected to cut rates further, suggests that the bank will look to follow through and deliver a final 0.1% – 0.15% cut. However, Sterling’s sharp deterioration in recent months, better than expected data and also some Political noise (criticism of highly accommodative monetary policy) suggest that the BOE will opt to remain on hold this time around.
Positioning ahead of the meeting has seen a small reduction in GBP shorts though with positioning still around record levels, there is plenty of room for a short squeeze if the BOE fail to provide the catalyst for further downside here. Sterling has already spiked higher ahead of the meeting as the High Court rules that the UK Government cannot legally trigger Brexit without parliamentary approval.